I panic sold and now have cash. How should I reinvest?

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Q: I panic sold and now have cash. How should I reinvest?

A: First, there’s no reason to feel bad about selling. We are experiencing some of the most profound changes to the economic status quo in years and economists and professional investors alike admit their inability to predict the consequences for financial markets. We are not yet through the uncertainty – let’s remember that the most punitive US tariffs are only suspended – and markets could still gyrate wildly before we get there. You may even find yourself glad that you ‘panicked’ and sold.

However, you say you want to reinvest so we need to suggest the best way to do so. In almost any circumstances the ‘drip-feeding’ method has much to recommend it; as things stand now it seems by far the best bet.

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Drip-feeding means investing regularly, for example monthly. The advantage is that you are not spending all your cash on purchasing investments at a single price, which would leave you with severe losses should markets then dive. If you invest monthly you will buy your chosen shares or funds at a variety of prices, some probably lower than current prices, some higher. On average this makes you less exposed to the risks of severe falls in the market; after all, you will automatically buy some shares or funds at those lower prices and reap correspondingly bigger rewards when markets eventually recover.

If instead of a lump sum you want to invest a certain proportion of your salary, drip-feeding is effectively what you will do automatically. You are in a different situation as you have a lump sum from the sale of your investments and want to redeploy that money into the markets.

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The question then is: over how long a period do you want to spread your reinvestment into the market? There is no obvious right answer to this, but it seems sensible to suggest that the deeper the uncertainty and the greater the likelihood that it will persist, the longer should be the period over which you space out your investments. Ideally you will want to be drip-feeding your money into the market while it continues to fall and while it starts to recover back to its former level, and to be fully invested once it starts to make new highs.

In the real world we cannot expect to get this exactly right but we should increase our chances if we drip-feed our money into the market roughly over the time it typically takes it to recover from severe losses in a bear market. This is something like two years. That said, we are not currently in a full-blown bear market. So perhaps a period of one to two years would make sense. If you opted for the latter, you would simply invest 1/24th of your lump sum each month for the next two years.

Of course, there can be no certainty that this approach, or any other, will produce good results. What it will do is protect you from the possibility that you invest your entire lump sum on one day and the market crashes the next. 

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